Last week, we went over the basics of planning for the eventual exit from a business. If you haven’t read that post, I highly recommend starting there! A successful transition out of a business is a big win for retirement planning.
This week is all about the other, smaller-but-still-valuable things you can do as a business owner to give yourself a leg up in your retirement plans. These strategies aren’t for everyone and you should definitely consult with your financial planning, accounting and legal teams before implementing any one of them.
- Corporate Investing. Individuals have limited options for “where” they can invest their dollars. RRSPs, TFSAs, and Non-Registered accounts are the status quo for individuals. Incorporated business owners have the additional flexibility of owning Non-Registered accounts inside a corporation. Why own investments inside of your corporation? One-word answer: taxes.
If your business earns $1 of revenue, you can pay yourself $1 of salary and the business deducts the expense. If you, in turn, buy $1 of RRSPs, you deduct the contribution and pay no taxes on that dollar until you withdraw it. Instead, should you choose to invest in a TFSA or personal Non-Registered account, there’s no deduction to claim. This line of investing makes your $1 of salary fully taxable. With a top personal tax rate of 50.40% in Manitoba, that could leave you as little as $0.49 to invest.
If you invest that $1 of revenue inside an account owned by the business, only corporate income tax is paid. In Manitoba, for businesses with less than $500,000 of net income, the tax rate is only 9%. That would enable you to invest $0.91 inside the business compared to $0.49 personally! This difference in tax rates often makes corporate investing the second most tax-effective strategy for business owners, behind only the RRSP.
- Individual Pension Plans. Salaried employees are at the whim of their employer for whether or not they participate in a pension program. Business owners on the other hand, can create their own! Individual Pension Plans (or IPPs) enable business owners to fund a defined benefit pension for their retirement. IPPs require some actuarial assistance, but often enable higher, tax-deductible deposits than RRSPs. IPPs are structured as Defined Benefit Pension Plans, guaranteeing the inevitable retirement income stream!
- Corporately Owned Life Insurance. Just as with corporate investing, business owners can have their companies be the owner and payor on their life insurance policies. This can have a multitude of benefits, such as using “cheaper” after-tax corporate dollars to pay premiums than after-tax personal dollars. For an individual to pay $1,000 in life insurance premiums at a 50.40% marginal tax rate, they need $2,016 of salary. For a corporation to pay $1,000 in life insurance premiums at a 9% tax rate, they only need $1,098 of revenue.
Some life insurance policies enable the accumulation of cash values inside the policy. This accumulation grows on a tax-deferred basis, even when the policy is corporately owned! This can enable corporately owned life insurance policies to double as a tax advantaged savings vehicle for the owner.
Aside from alternate investment structures, business owners can take advantage of their corporate structures for other personal benefits. Strategies such as income splitting with a spouse, timing of income or taking dividends over salary, just to name a few.
The moral of the story is quite simple. The journey to an earlier, more secure retirement for business owners doesn’t start at retirement. By planning ahead, maximizing your resource and planning for an effective transition, you can magnify the financial impact of your business success!
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